Boomers Head Out On That Highway, And Patrick Poised To Profit

As more baby boomers retire, many are hitting the road in recreational vehicles.

Instead of buying vacation homes, more boomers opt to get their motor runnin', head out on the highway, look for some adventure and whatever comes their way. RVs may not be the two-wheeled excursions Steppenwolf had in mind when it recorded "Born To Be Wild," but it works for them.

That's good news for Patrick Industries (PATK), which supplies parts for RV builders and serves both the towable and motorized RV segments of the business.

Just take a look at the numbers. The Recreation Vehicle Industry Association predicts that RV shipments will rise 4.4% to 438,000 units in the U.S. in 2017. That's on top of 12% growth expected this year. About 87% of shipments in 2016 will be towable RVs, with motor homes making up the remaining 13%, the RVIA said.

"We are optimistic about continued growth into next year due to favorable economic conditions." RVIA President Frank Hugelmeyer said in a statement. "Inflation and interest rates are near historic lows; a more vibrant economy has created jobs and reduced unemployment to near its lowest levels in decades; wages are finally showing signs of improvement; and household wealth has begun to accumulate toward record highs. These are all working in the RV market's favor."

Organic, Acquisitive Growth

Patrick has benefited from the growth of the overall RV business, as well as from acquisitions that have increased its content in each RV built. On top of that, Patrick Industries has a competitive edge through its strong customer relationships and close proximity to them, CJS Securities analyst Dan Moore told Investor's Business Daily.

"The ability to deliver quality product, on time, at a lower price point is something that they specialize in," Moore said. "That makes them tough to displace."

RVs range from folding camping trailers that start at $5,000 to luxury motorized RVs costing $500,000. The RV trade group has identified three consumer groups that are most likely to buy RVs: kid-free adult adventurers, nature lovers and active family adventurers.

But baby boomers reaching or nearing retirement also is a demographic shift that is helping RV sales, research firm IBISWorld says.

The baby boomer generation — roughly those ages 52 to 70 — generally has greater disposable income and opportunities for leisure, IBISWorld said in a report. About 11,000 baby boomers are projected to turn 65 years old each day over the next 15 years, Patrick noted in an investor presentation this month.

While baby boomers remain a key market for RVs, younger buyers have been driving sales lately, CJS's Moore said. They've been active in the lower end of the market, typically purchasing travel trailers in the $15,000 to $30,000 range, he said.

Top-Ranked In Group

IBD's mobile home and RV manufacturing group ranks No. 14 out of 197 industry groups. The six-company group has been fueled by strong performances from RV makers Thor Industries (THO) and Winnebago Industries (WGO).

Patrick, however, is the top-ranked company in the group. Headquartered in Elkhart, Ind., the epicenter of the RV industry, Patrick supplies wall and ceiling panels, flooring, doors, countertops, cabinets, bath fixtures and other components for RVs, manufactured homes and businesses. In the third quarter, it received 73% of its revenue from the RV business.

IBD'S TAKE:Patrick has outperformed IBD's Mobile Manufacturing and RV Group with a best-possible Composite Rating of 99. Click here for an IBD Stock Checkup on Patrick.

Its competitors are smaller, private companies, he said. Publicly traded parts supplier Drew Industries (DW) serves the RV market, but it has very little product overlap with Patrick, Moore said.

That's partly why Patrick products are becoming more omnipresent in RVs. Patrick's content per RV unit increased 20% year over year to $2,085 in the third quarter. It sees the potential to grab up to $6,300 in content per RV with its existing products.

"Third-quarter 2016 results reflect the continued robust strength in demand patterns in the RV industry, which experienced the strongest third-quarter wholesale shipment increase since 2010," Patrick President Andy Nemeth said on a conference call with analysts on Oct. 27. "We've experienced three consecutive quarters of double-digit RV shipment growth with continued optimism and positive retail trends, as we head into the fourth quarter and 2017."

Shares of the company were up 1.2% on Thursday and ticked up another 0.9% Friday. On Monday, shares ticked up another 0.5% to end the day at 74.40.

Lower Gas Prices

In the third quarter, Patrick earned 79 cents a share, up 36% year over year, on a 42% increase in sales to $304.2 million. Patrick has posted double-digit percentage gains in earnings per share on a year-over-year basis for 12 straight quarters.

Lower gasoline prices also have aided RV sales, IBISWorld said.

"RV shipments have been growing at solid double-digit rates for several years," Moore said. "We think that will slow to some degree, but we see at least two to three years of runway."

In anticipation of future growth, Patrick launched a capital expenditure program in the third quarter to expand capacity at some factories and invest in advanced automation, Nemeth said.

Patrick also has been highly acquisitive, buying 31 companies since 2010. Most recently it announced Dec. 5 that it had completed the purchases of Sigma Wire International and KRA International for a total of about $25 million.

It maintains the brands of the companies it acquires, in part because it obscures how much market share Patrick has in the RV supply chain.

"Every acquisition they make is another turbo-booster to their organic growth," Moore said. "They'll acquire a good brand with a decent customer base and then expand the number of units and revenue for that brand by plugging it into the larger distribution network that Patrick has. Those brands are run autonomously. You'll never see Patrick on any of the products. You'll see Gustafson Lighting or any one of dozens of other brands."

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